A Model Deal

AS THE WORLD grapples with unprecedented trade and economic uncertainties due to US Presi­dent Donald Trump’s erratic trade ‘negotiations’, last week India and the UK signed a Comprehen­sive Economic and Trade Agreement (CETA). A week after the UK deal was signed, Trump announced 25 per cent tariffs on India from August 1. Trump has also announced a penalty on India for buying oil from Russia, something US Senator Lindsey Graham had announced earlier in a planned “bunker buster” legislation against India. Graham is a well-known supporter of Pakistan in the US.

With this turmoil created by Trump, the India-UK CETA is an important signal to the world that trade and beneficial economic arrangements between countries still have room, provided there is political will to push such deals.

The CETA, which runs into 30 chapters, goes a long way in countering the image of India being a ‘tariff king’ and is a model for engaging with developed economies as it gets around barriers that have prevented the free flow of commerce.

“The average tariffs will fall and we will provide access without compromising on areas that are sensitive to our political econ­omy. The deal is an answer to allegations of India being a tariff king,” Commerce Secretary Sunil Barthwal said during a media interaction held on July 26. A formalised engagement through the agreement meshes the Indian and UK economies and makes business more predictable.

The agreement gives a window to Indian industry to adapt and organise itself since opening up is phased in many sectors, with gradual changes in tariffs and quotas. “We have successfully argued that India is a developing nation and needs certain levels of protection,” Barthwal said. The willingness on the part of the UK to accept India’s concerns reflects recognition that India’s economy is stable and its legal system is progressive.

This marks an inflection point as the CETA was first discussed when Tony Blair and Manmohan Singh were prime ministers of the UK and India respectively. There are gains for Indian busi­nesses that need to send employees to the UK as there is no cap on such workers while their social security contributions will be deducted and deposited in India. This is a significant amount as even a starting-level employee at £5,000 a month salary would gain around ₹18 lakh a year.

“Our FTAs [Free Trade Agreements] are with countries with which we do not have a significant contribution. This is true in the case of the UK or with treaties concluded with Australia, UAE and EFTA [European Free Trade Association]. This applies to ongoing ne­gotiations with the US, EU, Oman and New Zealand too. The main thing is if these agreements give an edge over rivals in Asia such as ASEAN, Bangladesh, Vietnam… it works for us,” Commerce Minis­ter Piyush Goyal had told the media on July 27. He said agreements with countries such as the UK and Switzerland (EFTA) in areas like gender and Intellectual Property Rights (IPR) are a turning point. “Could you have imagined bridging the gap with these nations on issues like IPR a few years ago?” Goyal asked. The minister also said India has shed its ideological blinkers and added that the interval before the agreement kicks in—the pact requires ratification by the British parliament—will be used to work with Indian industry to improve capacities and quality. “There is no compromise on quality. The prime minister has said what we make should be world-class. You can see in our new government offices and our new Parlia­ment,” Goyal said.

There is considerable discussion on Scotch and the impact of freer imports. “The imports are $160 million at present and we kept discussing this for years. Indian blended whiskies are very popular and use Scotch. You all know how much blended whis­kies are sold and what is being consumed,” an official said.

India and the UK are looking ahead and the CETA is not meant to cater to only worst-case scenarios. The two sides have expressed a determination to make it work. This applies to measures like Carbon Border Adjustment Mechanism (CBAM) which is not yet a law in the UK. “I am told by European businesses that I am speaking like their minister when I oppose such barriers. Carbon regimes will increase costs of European and British businesses. In any case, if such a situation arises, we have the option to ‘rebalance’ or withdraw concessions,” Goyal said. But the two sides do not see this as a deal breaker and are instead excited about the opportuni­ties that the agreement offers. India’s strengths in labour-intensive industries will help the British economy and import of high-quality machinery will improve manufacturing capacities back home. With the UK accepting that India’s developing economy needs consideration, 99 per cent of its tariff lines are open for India. India has made sure its strategic sectors and PLI industries are protected. The quotas for luxury cars are structured to protect Indian makers, but Barthwal was of the view that growth in the sector and new collaborations will make these quite redundant. “It needs to be re­membered that in areas like textiles, we hardly have any access and tariffs are up to 12 per cent. This will change dramatically and we need to be ready to take advantage,” said Barthwal.

Over the past two decades or so, India has learnt a lot on the trade front. For example, in the India-ASEAN on Trade in Goods Agree­ment, signed in August 2009, there is a chapter on Rules of Origin (RoO). But over time, several loopholes were used to dump Chinese goods on India even as India tried to fix its trade imbalance with China. One reason why, even after a political push, efforts to reduce ‘dependence’ on China could not succeed was this particular agree­ment. India’s reluctance to join the Regional Comprehensive Eco­nomic Partnership (RCEP) was in no small measure due to the dan­ger of an open door to Chinese imports under such an agreement.

The CETA with the UK, which has a more transparent account­ing framework for calculating value addition, content localisation, etc, reflects this learning process on India’s part. There is, of course, a geographic factor at work as well: China is far off from British shores for any dubious dumping exercise to intrude into the deal.

This was the crux of the matter when Goyal pointed out dif­ferences with past FTAs. He said the ones with ASEAN and others hardly benefited the Indian economy and were proving difficult to rework or review. “This FTA and others negotiated by the Modi government are evidence of India’s rising global stature and the trust it invokes,” he said. The benefits will be spread widely from Pashmina shawl makers and Bhagalpuri saris. “For FTAs to work, they have to be a win-win,” he said. “The India-UK FTA is a gold standard, it marks the way for the future.”

GOYAL DID NOT directly answer questions as to whether the UK CETA will be a guide for one with the US, saying each pact is unique. But it is clear that areas like genetically modified farm products, dairy and agriculture are out of bounds. The US was keen on a pact being announced in May itself, but Indian negotiators have insisted that all fine print must be sorted out.

The pending trade agreement with the US reflects the chaos in the global trading and economic system since January this year when Trump became US president for the second time. Since then, tariffs and uncertainties have ratcheted up dramatically, beginning with the ‘Liberation Day’ tariffs announced by Trump on April 2.

There are three sources of uncertainty for global trade and economy. All radiate from the US. Two are closely linked and the third is the product of the US legal/judicial system.

If one looks at the jagged curve of tariffs, counter-tariffs, pauses and the trade deals that countries have arrived at with the US, the average US tariff on imports is the closest it has been to the Smoot- Hawley Tariff Act of 1930. That Act raised tariffs to a peak rate of 59 per cent by 1932. In practice, a major fraction of goods imported into the US was ‘non-dutiable’, with the result that average tariffs peaked around 20 per cent. With the Japan, Vietnam (20 per cent tariffs), EU (15 per cent) and other deals, the average estimated tariff is around 17 per cent, the closest the US has been to Smoot-Hawley levels.

These ‘deals’ have not gone down well in either the EU or Japan. But short of the pain of massive tariffs—which will kick in on Au­gust 1 when the time for getting a deal runs out—these countries signed on the dotted line. In the case of the EU and Japan, there was an additional complication—these countries are heavily depen­dent on the US for protection and security provisions. The EU is involved in funding Ukraine in its war with Russia while Japan faces serious security threats from China and North Korea. This was the 21st-century version of a deal that could not be refused. The US now has a 10 per cent ‘baseline’ tariff for all countries and there are no exceptions.

The elevated tariffs are just one part of the problem. For example, in the deal with the EU, large purchases of US energy, amounting to $750 billion over the next three years, is a condition that sweetened the deal. There is, of course, no way Europe could undertake such large purchases of energy without wholly reorganising its energy trade with the rest of the world. The European leaders who negotiat­ed the deal know that as do the leaders in various European capitals.

In the case of Japan, a promise has been made to ‘invest’ $550 billion in the US by Japan. Again, this is a promise that can hardly be delivered in a straightforward manner. This is because manu­facturing since the late 20th century has involved large, diversified and complex supply chains spread out over different countries and continents. The ‘one shop’ manufacturing processes are now either extinct or not economically feasible.

Then there is the issue of US courts intervening in decisions made by Trump on tariffs. On May 28, the US Court of Interna­tional Trade (USCIT) stayed some of the tariffs announced by Trump under the International Emergency Economic Powers Act (IEEPA). An appeals court stayed the USCIT ruling but is soon set to hear the appeal. It is not clear how the courts will rule in the matter, adding another layer of uncertainty for the trading system.

Trump wants to upend the entire global manufacturing sys­tem and ‘bring back’ manufacturing to the US. Trump’s carping about Apple locating its iPhone manufacturing facilities in India is an example. He does not want Apple to manufacture in India and wants it to relocate production to the US. At the moment, the US is in no position to manufacture complex devices like iPhones that require the output from supply chains largely located in Asia.

In India’s case, there is an added problem. Even as the trade deal is being negotiated, a number of influential US senators are sponsoring a Bill, an “economic bunker buster” in the words of one of its moving forces, Lindsey Graham. The planned Bill seeks to penalise India, China and Russia; the first two countries for importing oil from Russia and allegedly helping its war efforts, and Russia itself for its war with Ukraine. In simple terms, shorn of niceties, this is a blackmailing tactic.

The deal with India is currently involved in protracted nego­tiations over access to India’s market for US agricultural prod­ucts. The US is one of the biggest subsidisers of agriculture. India cannot match those levels of subsidies and access to the Indian market will prove ruinous for Indian farmers. Predictably, this became a sticking point.

On July 29, Trump said India could face tariffs anywhere be­tween 20 and 25 per cent after August 1. This is the date on which the ‘pause’ on tariffs, announced by Trump even as countries ne­gotiated deals, is set to expire.

The trouble for the US and Trump as well is that he has mul­tiple goals: reducing the US trade deficit, bringing back manu­facturing, as well as maintaining US primacy in the world. He is using a single instrument—tariffs—to attain these multiple goals. Tariffs are a blunt instrument to secure national interests, especially in the case of the pre-eminent economic power in the world. But Trump thinks this approach is getting the results he wants. The world is bending to his wishes, for now.

CETAcommercial barriersdeveloping economiesDonald TrumpIndia-UK trade agreementKeir Starmermutual benefitNarendra ModiPiyush Goyal